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RISING RATES SPUR EXIT FROM BOND FUNDS

SHARE RISING RATES SPUR EXIT FROM BOND FUNDS

Individuals have been abandoning short-term-bond mutual funds as rising interest rates have knocked down their share prices, according to data gathered for Money magazine's Small Investor Index.

Many investors had viewed short-term bond funds, now yielding about 6 percent, as safe alternatives to money-market mutual funds, which pay only 3.6 percent. With interest rates shooting up, however, short-term bond funds lost 3 percent of their value from February through April.Last week, Paine Webber disclosed that it had pumped $33 million into its Short-Term U.S. Government Income Fund to reimburse shareholders for losses of 5.7 percent this year, attributable in part to the tumbling value of so-called derivatives - generally, securities whose price depends on some underlying asset or the direction of interest rates.

So far this year, shareholders have withdrawn about $7.1 billion from short-term bond funds - 10 percent of their total assets - according to Strategic Insight, a New York fund research firm. Since Feb. 1, for example, investors have redeemed $760 million from two Fidelity short-term bond funds with total assets of $2.8 billion, and $254 million from the $2.7 billion Scudder Short-Term Bond Fund.

With further interest rate hikes still possible, investment advisers such as William Donoghue, the publisher of Donoghue's Money- letter, suggest that investors who want to avoid the risk of losing any principal stick with money-market funds.

Last week, the Money Small Investor Index, which tracks the typical individual's holdings, rose $65 to $45,717. Stocks lost $54, while bonds added $112. CDs and money funds kicked in $9, and gold dipped $2.